3.7 ANALYSING THE STRATEGIC POSITION OF A BUSINESS Flashcards
Define Assets
What the business OWNS
Define Liabilities
What the business OWES
Define Non-current Assets
Assets that provide a benefit for the business in the long-term (Over a year)
Give an example of non-current assets
Buildings and machinery
Define Current Assets
Assets that will be used up or sold in the short-term and the cash balances kept within the business
LESS THAN A YEAR / WITHIN A YEAR
Give an example of current assets
Raw materials
Define Current Liabilities
What the business owes in the short-term
LESS THAN A YEAR / WITHIN A YEAR
Give an example of current liabilities
Short-term debts
Define Non-current Liabilities
What the business owes in the long-term
MORE THAN A YEAR
Give an example of non-current liabilities
Long-term debts
Define Working Capital
Cash available to pay short term debts/liabilities
Equation for Working Capital
Current Assets - Current Liabilities
Define Net Assets
Value of assets overall
Equation for Net Assets
Net Current Assets + Non-current Assets - Long-term liabilities
What is Net Assets equal to?
Capital Employed
Define Capital Employed
Amount of long-term money put into a business
Define strategy and tactics
Strategy: how we do things, medium/long term plan of action, put in place to achieve a business objective.
Tactics: short term that helps to achieve a strategy- daily activities such as sending emails
Influences on the mission of a business
- Size
- What its about
- Target market
- £££
- Owners
- PESTLE (external factors)
Internal influences on Corporate Objectives
- Business ownership
- Attitude to profit
- Ethical stance
- Organisational culture
- Leadership
- Stakeholder influence
External influences on Corporate Objectives
- Economic environment
- Political / legal environment
- Competitors
- Social and technological changes
Define Strategic Position
Concerned with the way in which a business as a whole distinguishes itself in a valuable way from its competitors
A firm’s decisions on how to serve customers and compete against rivals
Define ‘short-termism’
- For survival
- Up to 1 year
- An excessive focus on short-term results
Disadvantage of ‘short-termism’
- Can mean forget about long term measures and not focus on them
Why may a business be concerned about the short term?
- Stock market actions
- Reliance on bonuses based on short-term performance
- Changes in leadership and strategy
Give a contextual example of a business that has a long-term perspective
Unilever - doesn’t publish data to analysts and media
How would you evaluate the ROCE of a business?
The higher the percentage figure, the better.
Compare with the ROCE from previous years to see if there is a trend of ROCE rising or falling.
Based on snapshot of business’ balance sheet
What does ‘return on capital’ tell us?
- Measure of return
- How good a business is at converting money invested to profit
- Provides way of comparison
- Speculate opportunity cost - what a business could have done if they invested elsewhere
Mention if internal or external
What does ‘SWOT’ stand for?
Strengths (Internal)
Weaknesses (Internal)
Opportunities (External)
Threats (External)
Define ‘SWOT’ analysis
Method for analysing a business, its resources and its environment.
Focuses on the internal strengths and weaknesses of a business (compared with competitors) and the key external opportunities and threats for the business.
What does ‘SWOT’ aim to cover?
- What the business does better than the competition
- What competitors do better
- Whether it is making the most of the opportunities available
- How a business should respond to changes in its external environment
Mention examples of strengths of a business
(SWOT)
- Reputation for high quality products
- Seen as innovative
- Very profitable in comparison to other organisations
Mention examples of weaknesses of a business
(SWOT)
- Reputation as poor employer
- Product portfolio full of declining products
- High levels of staff turnover / absenteeism
Mention examples of opportunities of a business
(SWOT)
- Main competitor having financial difficulties
- Government encouraging more spending
- Fall in exchange rates, helping exporters
Mention examples of threats of a business
(SWOT)
- High levels of competition in a market
- Innovation / USP from competitors
- Increased interest rates
- Products becoming obsolete
Define ‘opportunities’
(SWOT)
What a business can take advantage of
Give examples of an internal strategy (method of achieving a goal or target)
- Delayering
- Expansion
- Retrenchment
Give examples of an external strategy (achieving a goal or target)
- Analysing trends
- Being aware of laws
- Being aware of technical advances
- Viewing economic conditions
Define an ‘incremental strategy’
Bit by bit
Give examples of an incremental strategy (achieving a goal or target)
- Kaizen
- Lean production
- Streamlining: improvement of the efficiency of a certain process
Give examples of a disruptive strategy (achieving a goal or target)
- Adapting to digitalisation: modern world
- Adjusting to Covid-19
- Becoming more environmentally friendly to ward off pressure groups
Why is change valuable?
- Out the old, in with the new
- To innovate products: Netflix going online
- Expansion: target new markets
- Become more efficient
Why is change valuable?
- Out the old, in with the new
- To innovate products: Netflix going online
- Expansion: target new markets
- Become more efficient
What does the Lewis Forcefield Model suggest?
Forces for change vs. Forces restricting change
Whichever is higher has a stronger influence
()
Change in middle and arrows on each side
Advantages of ‘Lewis Forcefield Model’
- Easy to observe / make
- Identifies both sides of the predicament
- Identifies negative forces so the business can strategise how they can get around this
Disadvantages of ‘Lewis Forcefield Model’
- Requires participation: Reliant on people scoring individually if they are ‘for’ or ‘against’ - bias
- Could cause conflict between for and against
Define ‘ethics’
Moral principles or standards that guide the behaviour of a person / business
Being ethical = doing the right thing!
What makes a business ethical?
- Responsibility for mistakes
- Making customers aware of origins/change of products
- Less waste
- Following laws
- No sweatshops
Advantages of a business being ethical
- Gains more customers: e.g. vegans
- Builds positive reputation through good press/media
- MAY BE WORTH INVESTMENT
Disadvantages of a business being ethical
- Higher cost
Define ‘core competencies’
Unique strengths of a business that cannot be easily replicated by competitors
Should be adapted to meet demands of the market
Must focus on them when developing strategies
Difficulties a business could face when using non-financial methods to analyse performance
- Time consuming
- May be unreliable as doesn’t look at finances which could pinpoint certain issues with cashflow
- May be opinion based, BIAS? Disruption in accuracy
Common reason for short-termism
- Survival
- External environment (PESTLE) - COVID-19
- Stock market’s influence
- Reliance on bonuses from employees
- Frequent changes in leadership and strategy
If a business focuses too much on the short term, what may happen?
- Long term becomes less important, which could cause future issues
- Distract them from overall aim of the business
How can you tell if a business is short-termism?
FINANCIAL INCENTIVES BASED ON THE SHORT-TERM, seem to be throwing all money away
- Short-term bonuses (e.g. sell 20 houses in next 4 months for a bonus)
- High dividends rather than reinvesting profits - satisfy shareholders - REINVESTING IS LONG-TERM TO GROW
- Take-overs rather than internal growth - increase customers quicker and easier
Define ‘long-termism’
Tendency for management to focus on long-term gains
(1 year+)
- Shows business’ ability to sustain/grow
e.g. staff training (build productivity overtime) / building core competencies
Advantage of ‘short-termism’
Tackles issues promptly
What is the ‘Kaplan and Norton’s Balance Scorecard’?
Highlights range of influences on the success of a business beyond that of the traditional view of looking at profit
Combines non-financial measures with financial measure (CREATES BALANCE!)
Top-down approach
Identifies key performance indicators
What is the ‘Kaplan and Norton’s Balance Scorecard’ made up of?
FOUR MAIN PERSPECTIVES (FT. KEY PERFORMANCE INDICATORS)
Spider diagram with ‘Vision and Strategy’ in middle, then around it…
- Financial
- Internal processes
- Organisational capacity
- Customer
Advantages of ‘Kaplan and Norton’s Balance Scorecard’
- Provides broader view of business performance
- Provides specific targets that can be MONITORED
- Tailored to business, accurate
- Involves all stakeholders in the business
- Highly flexible - KPI’ chosen by business
Disadvantages of ‘Kaplan and Norton’s Balance Scorecard’
- Can get complicated
- Requires a lot of data - time / money
- Too many KPI’s to manage
- Balancing is not easy
- Needs updating regularly: admin costs / extra tasks for staff
Suggest a focus of financial performance (‘Kaplan and Norton’s Balance Scorecard’)
Financial performance
Suggest a focus of customer (‘Kaplan and Norton’s Balance Scorecard’)
Customer satisfaction
Suggest a focus of internal processes (‘Kaplan and Norton’s Balance Scorecard’)
Business efficiency
Suggest a focus of organisational capacity (‘Kaplan and Norton’s Balance Scorecard’)
Knowledge and innovation
Suggest a KPI of financial (‘Kaplan and Norton’s Balance Scorecard’)
ROI
Suggest KPI’s of customer (‘Kaplan and Norton’s Balance Scorecard’)
Levels of returns, service rating
Suggest KPI’s of internal proceses (‘Kaplan and Norton’s Balance Scorecard’)
New product lead times, unit costs
Suggest KPI’s of organisational capacity (‘Kaplan and Norton’s Balance Scorecard’)
Employee retention
Flow of new product development ideas
Define ‘The Political Environment’
- The government actions that impact on the strategic and functional decisions made by a business
- Can be by local, national or international authorities
- Impact heavily on the competitive environment and the infrastructure that allows businesses to operate effectively
Define ‘legislation’
Involves creating and enacting laws in order to protect individuals, businesses and society
Define ‘legal environment’
Collection of legislation that impact on activities of organisations
Scope and effects of the UK / EU law related to competition
- Promote fair competition - stop MONOPOLY happening
What is an ‘anti-competitive product’ ?
ILLEGAL
Doesn’t promote fair competition in the market
e.g. price fixing between businesses
Governments impact on mergers and takeovers
(WITH CONTEXT)
They are monitored and will not be allowed if it is deemed that they significantly reduce competition
e.g. TUI and Thomas Cook not allowed to merge - monopoly empire
Markets that are not competitive will be investigated
What does the ‘competition law’ not allow businesses to do?
Firms are not allowed:
- To agree prices with competitors
- To limit production in order to reduce competition
- Partition markets or customers between each other (TERRITORY) - e.g. geographically where each firm takes a different region to avoid competition
General features of UK and EU Competition Policy
- Seeks to improve the competitive nature of markets
- Seeks to alleviate market failure to protect the interests of consumers and society as a whole
How can the government make sure that ‘competition law’ is successful?
- Curtailing monopoly power and protecting competitive markets
- Restricting mergers and prohibited cartels (businesses group together in order to regulate supply to markets)
- Creating fairness in markets for both businesses and consumers, so that businesses don’t abuse their dominant market position but are able to make acceptable profits that will drive innovation and increase productivity
Define ‘cartel’ (Competition Law
Businesses working together to only supply certain businesses, to benefit them
‘We are not going to use you unless you stop supplying to…
Define ‘monopoly’
COMPLETE DOMINANCE OF MARKET
- There is only one business in the market
- Government refers to any business that has at least 25% market share as having monopoly powers
On what condition will CMA regulate markets for ‘monopoly power’ ?
When they have 40% market share
Define ‘market power’
Ability to set price above those that would be charged if there were competition
How can ‘monopolies ‘ exploit consumers? And why may this enforce regulation?
Charging high prices as customers have NO other choices… therefore they are regulated, to stop this happening
FREE AND FAIR COMPETITION MUST BE ACHIEVED
Benefits of UK and EU ‘Competition Policy’
- Lower prices: no monopoly utilising, lots of other options
- Improved quality: businesses strive to improve quality and customer service as MORE RISK of losing market share
- Innovation: businesses invest in R&D to compete - allowing new products for society
- Competitive advantage: more efficient businesses that have better understanding of the requirements of the consumer
What does the ‘competition policy’ allowing more room for innovation benefit the most?
New / small businesses to grow
Consumers gaining better products
Define ‘labour market’ / ‘employment legislation’
Aims to ensure that employees and employers act fairly in dealing with each other by defining their rights and obligations
What aspects comes under the ‘Equality Act 2010’
- Age
- Disability
- Gender reassignment
- Marriage and civil partnership
- Pregnancy and maternity
- Race
- Religion and/or belief
- Sex
- Sexual orientation
What is the main disadvantage of having the ‘Equality Act 2010’ ?
Difficult to regulate
What are all of the rights given to employees?
- Employment Relations Act: allowing trade union membership
- Employment Act: relating to dispute resolution
- Children and Families Act: shares parental leave and paternal pay. Allows flexible working for all employees
Define ‘Children and Families Act’
- Allows maternity / paternity leave
- Allows flexible working for all employees
Define ‘Employment Relations Act’
Allowing trade union membership
Define ‘Employment Act’
- Dispute resolution
- Mediate the relationship between workers, employing entities, trade unions and the government.
Define ‘Labour Market Law’
And what it covers
Designed to protect the worker from discrimination within the workplace and to make it easier for businesses to recruit workers
It covers:
- Wage discrimination
- Discrimination
- Labour market reforms: reduction in trade union power and influence
Should the national living wage be increased?
(ARGUMENTS FOR)
- Reduces inequalities
- Increases demand in the economy (GDP)
- Improves standard of living
- Less pressure groups
- Makes staff more productive and satisfied
Should the national living wage be increased?
(ARGUMENTS AGAINST)
INCREASE IN BUSINESS COSTS
- May create unemployment: business tries to survive
- Lower supply of goods and services as workers become too expensive
- If goes up, price for everything else goes up
What does the UK and EU law related to the environment relate to?
Water + Land
What does the ‘environmental law’ enforce?
And specify…
Ensures businesses don’t have negative impact on environment
- Limits to emission levels to sea, rivers and air
- Guidelines, limits and bans on waste disposal (e.g. plastic bags)
- Quotas on use of finite resources (e.g. fishing)
GOVERNMENT CAN INSPECT AND FINE THOSE WHO FAIL TO COMPLY
Why was introducing a cost to plastic bags a good strategy by the UK government?
Changed the way you think about using them
Anything of a cost makes customers think
Main disadvantage of following ‘environmental laws’ for a business
Compliance can often increase costs
What are the two types of environmental law?
- Environmental Protection Act
- Environment Act
BOTH PUT COSTS UP
What is the ‘Environmental Protection Act’ (Environmental Law)
Businesses must improve the control of pollution arising from industrial and other processes
